Today’s post is more of a precious metals investing for dummies guide. The truth is that while many people have heard about precious metal investing, they don’t know how they can go about it. This post will cover the basics needed for one to get started, so read on to find out more about this interesting topic.
Gold and silver have for many years been recognized as valuable precious metals that many individuals would not mind owning. Even in the present-day world, precious metals are still coveted and highly sought after by savvy investors. That said, not all forms of precious metals are used for the purposes of investment, and not every precious metal dealer will have the right metals for you. Below, we take a look at the precious metals that have found their place in the portfolios of most precious metal investors:
We shall get started by looking at the king of them all: gold. Gold stands out due to its durability, malleability, and heat and electrical conductivity. It has also found its use in industries such as dentistry and electronics, though it mainly finds its use as a base for jewelry, as well as a form of currency.
Gold trades mainly as a function of sentiment, and its price is not significantly affected by the laws of demand and supply. This arises from the fact that any new supply from gold mines is greatly outweighed by the above-the-ground supply of gold. Generally, when hoarders feel like selling their assets, the price of gold drops, and when they want to purchase more gold, a new supply is absorbed, causing the prices of gold to go higher.
A rise in the desire to hoard the gleaming yellow metal can be attributed to several factors:
- Systemic financial concerns: When financial institutions and currency are believed to be volatile, as well as political stability, gold is frequently sought as a safe haven.
- Inflation: When actual rates of return in the stock, bond, and real estate markets are negative, consumers frequently flock to gold as a safe-haven asset.
- War and political turmoil have always prompted people to stockpile gold. A lifetime’s worth of savings can be made portable and stored until it’s time to exchange it for food, housing, or safe transit to a less perilous location.
Unlike gold, the price of silver is seen to oscillate between its perceived role as a precious metal that can be used for the purpose of the storage of value, and as an industrial metal. These reasons contribute to the price of silver being more volatile than that of gold.
This implies that while silver and gold are traded together like items to be hoarded, the industrial supply and demand for silver have a significant impact on its market price. The price equation has also significantly fluctuated with the rise of new innovations which include:
- The previous predominant role of silver in the photography industry, silver-based photographic films were highly sought after. this has, however, been eclipsed by the advent of the digital camera.
- The use of silver in batteries, microcircuits, and other related markets.
- The rise of emerging middle-class market economies in the east has been depicted as enthusiastic consumers of silver-based products. This has led to an explosive demand for this precious metal.
One thing that remains unclear is the extent to which such developments will continue affecting the demand for silver, for non-investment purposes. Such is something worth considering and keeping a close eye on, based on the fact that the price of silver is affected not only by its use as a store of value and in jewelry manufacture, but also by its applications.
Like gold and silver, this precious metal is traded on global commodities markets. Surprisingly, this precious metal tends to fetch a higher price (per troy ounce) than gold during times of economic and political stability, owing to the fact that it is rarer. Other factors that significantly affect the prices of platinum include:
- It occurs that platinum mines are mainly found in two nations – South Africa and Russia. This unfortunately creates the potential for the occurrence of cartel-like action that would lead to the rise in platinum prices.
- The demand for catalytic converters in the auto industry, as a result of the passing of “clean air” legislation, has a significant impact on the price of platinum in the market.
- Platinum is also an industrial metal, just like silver. It has found its use in the manufacture of automotive catalysts that minimize the emission of harmful gasses, as well as the manufacture of jewelry.
Combined, these factors make platinum the most volatile precious metal amongst the IRA-approved precious metals.
Not many people know about the existence of this precious metal, let alone its uses. Palladium is a shiny silvery metal that finds its use in the following industries:
- Chemical applications
- Groundwater treatment
Most of the palladium in the world is sourced from mines in the USA, Canada, South Africa, and Russia.
Jewelers first used palladium in the manufacture of jewelry in 1939. It is well-known that mixing this precious metal with yellow gold leads to the formation of an alloy that is stronger than white gold.
Pure palladium is malleable, but it becomes harder and stronger as a metalworker uses it at room temperature. Thin sheets of palladium have found their use in solar energy and the manufacture of fuel cells. This precious metal also happens to be 12.6% harder than platinum, hence is a more durable option in relevant applications.
How can one invest in these precious metals?
You can gain exposure to any of the above-listed precious metals by picking one of the following investment options:
- Precious metal Exchange Traded Funds
- Mutual funds and stocks that are based on precious metals
- Precious metal futures and options
- Bullion / physical metals
N.B: The only option that gives you access to the physical precious metals is investing in bullion, which can be done through a uniquely-structured and self-directed individual retirement account known as a Gold IRA/ Precious metal IRA.
Frequently Asked Questions on “Precious Metal Investing”
1. Are precious metals a good investment?
Precious metals offer investors protection against the forces of inflation. The government cannot order the printing of more precious metals. For there to be an oversupply of these metals in the market, mining companies need to spend a lot of capital on the mining and exploration efforts, which in itself is highly unlikely. Precious metals also provide a low or negative correlation with paper assets such as stocks and bonds.
This does not mean that precious metals do not carry any risks- they may have short-term volatility that can affect your overall holdings as an investor. You may, however, benefit from these metals if you use them for long-term investing.
2. What are the advantages of investing in precious metals over paper assets?
Investing in precious metals presents some benefits over investing in paper assets, which include:
- They are an inflationary hedge.
- Portfolio diversification
- High liquidity levels
- Easy to buy
3. What is the best way to invest in precious metals?
The best way to invest in precious metal is to purchase the physical precious metal, which is my top-recommended option or to purchase precious-metal-based ETFs. Note that while ETFs have a greater potential for the generation of higher returns, they also have risks that are similar to those of paper assets, and can be affected by the state of the global economy just like stocks.
4. What is one major downside to investing in Precious metals?
Precious metals, unlike many other assets, do not have cash flows, so an individual cannot expect any income until it is time for them to sell their holdings. This is the reason most investors opt to invest in precious metals as part of their long-term strategy.
That will be all for this post on precious metal investing for dummies. I hope that you found it helpful as a beginner and that it will help you get started in investing in these precious metals on the right foot. Let me know if you have any questions about it, or whether you’d need any help getting started.
I wish you well,
Eric, Investor and Team Member at Gold Retired!